TL/DR –
Joe Biden signed the Inflation Reduction Act in August 2022, which he and his administration claim was the most significant action on clean energy and climate change in US history. The law led to the outsourcing of some operations such as the production of electric vehicles, with at least five Chinese battery manufacturers announcing significant investments in Morocco since. However, the Wharton School of the University of Pennsylvania concluded in its report that the law’s impact on inflation would be “statistically indistinguishable from zero,” while the Tax Foundation claimed the bill would worsen inflation by restricting the economy’s productive capacity.
Impact of Biden’s Inflation Reduction Act on Clean Energy and China
In August 2022, Joe Biden enacted the Inflation Reduction Act, dubbed as crucial action for clean energy and climate change by the White House. This legislation has been regarded as favorable for China, almost two years into its implementation.
The Act, aimed at clean energy and climate change, has led to the outsourcing of operations such as electric vehicle (EV) production to trading partners, including China. As reported by Fortune, significant investments in Morocco have been announced by at least five Chinese battery manufacturers since the Act’s inception.
Furthermore, new tariffs announced by the White House for Chinese vehicle imports in May were intended to decrease China’s market share in this sector.
“A giveaway to China”
Simultaneously, the Biden Administration modified rules for tax credits for electric vehicles, making more EVs eligible for up to $7,500 of credits. To be eligible, manufacturers could not source critical minerals or battery parts from manufacturers where China or other “foreign entities of concern” have control exceeding 25%.
Sen. Joe Manchin (I-WV), chairman of the Senate Energy and Natural Resources Committee, criticized these new rules, labeling them as the White House’s endorsement of products “made in China”. Critics, according to Fortune, argue that these rules favor China and extend its EV dominance.
The public policy research firm Rhodium Group suggests that the rules have led Chinese producers to increase investment in countries with US free trade agreements, notably South Korea and Morocco, to bypass some IRA barriers.
Does the Inflation Reduction Act live up to its name?
A 2022 report from Wharton School examining the law’s impact on inflation concluded its effect would be “statistically indistinguishable from zero”. Contradictorily, the report also projected no impact on GDP by 2031 and a 0.2% increase by 2050.
The Tax Foundation also analyzed the Act, stating, “By reducing long-term economic growth, the bill worsens inflation by restricting the economy’s productive capacity.” Uncertain projected revenues and increased spending are also credited with potentially exacerbating inflation, especially in the first four years after the Act’s implementation.
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